Bargain hunters spur gold price rally

The spot gold price made an attempt to breach the $1,600 level on Monday, adding more than $25 after recovering from a 7-month low reached last week.

In after hours trade the yellow metal was changing hands at $1,593, up just over 1% after earlier hitting a high of $1,597.

The metal was boosted by a weaker dollar and the potential for bad news emerging from Italy elections which sent stocks tumbling worldwide.

Short covering by traders and bargain hunters making the most of the recent dip in prices also boosted gold.

Gold came dangerously close to straying into bear territory– officially defined as a 20% pullback – last week after US central bank minutes showed a rethink of its quantitative easing programs, in place since the 2008 financial crisis, is underway.

The metal slumped to $1,555 on Wednesday – that's an 18.5% retreat from the record high – on fears an end to QE will diminish gold's status as a hedge against inflation.

MarketWatch quotes Gene Arensberg of the Got Gold Report as saying gold may have formed a bottom as fund managers are holding record short position and the lowest net longs since November 2008:

Extreme lows for the managed money net long positions are “usually associated with important bottoms for the price of gold,” he said. “Therefore, unless there is a tectonic shift under way, we are likely nearing an important bottom for gold prices.”

"With supportive news over the weekend, we can argue that we have removed quite a lot of overhangs seen in gold recently but we need to see a move above $1,600 and even $1,625 before we start talking about a recovery.

Gold is coming off a 12-year winning streak after a 7% annual gain in 2012, but has now fallen more than 10% below its price this time last year.